Jim Cramer has been pushing Sears Holdings (SHLD) because he believes the operations are improving and that sentiment on the stock is too negative...

What will mainstream media do now with Sears (SHLD:Nasdaq) ? What will they say? Eddie Lampert is taking no money, there's no stock option issuance, he's got a strategy of no longer giving goods away for nothing, and he's returning capital to shareholders at an amazing rate. What can they say? How can they knock the guy? Can they keep up with that capital expenditures story? I mean, they can focus on the declining sales only for so long, because we like margins going up more than sales.

OK, excuse me for gloating, but I keep wondering what the heck Lampert did wrong to make it so that the mainstream media keep picking on him. We should hate executives who line their pockets with options while their stocks do nothing. We should like executives who take no pay unless the stock goes up. We should hate executives who glad-hand Wall Street and schmooze a stock up; we should like executives who stick to their knitting and don't hold hands. We should hate executives who let all the upside go to them in the form of options and massive dilution. We should like executives who return every dime to the shareholders that they can.

Or, to put it another way, we should like the good guys who make us money and dislike the bad guys who lose us money. Shouldn't we?

Let's compare the executive pay issues and performance issues of Comcast (CMCSA:Nasdaq) and Sears. I don't know anyone who ever knocks Brian Roberts. But all of his great performance is in the past. This stock has done nothing for seven years. Seven lean years! But Roberts has paid himself a fortune over that period -- no, make that many fortunes.

Now Lampert, on the other hand, has a stock that performed unbelievably over the last two years, I mean amazingly, with its going up five times. It's up 24% this year. But all anyone has been focusing on is how much it has come down from the high, the so-called 30% loss figure. Go read the 8-K: Lampert's the polar opposite of Roberts when it comes to compensation.

Doesn't matter, though. Right now, at this moment, someone in the mainstream media is going to pen a piece about how Lampert has no strategy and is simply a greedy hedge fund manager totally out for himself.

I admit it, I don't get it. When people ask me why he gets such bad press, I just keep coming back to one issue: jealousy. Maybe because I started the same day he did at Goldman Sachs, maybe because I know what a funny and decent guy he is, maybe because I don't know anyone who works harder than he does -- and everyone knows I am a hard worker -- I just can't stand the press he gets.

For a while I stopped talking about Lampert. I figured maybe the press would stop picking on him if I didn't write that he's my friend. Didn't seem to stop the negative ink, though.

Now I feel differently about it. With the float shrinking, with the Sears Canada dividend coming to us, with the real estate sales not even happening yet, with the whole darned thing worth less than $20 billion, I welcome all the short-sellers we can find.

Gentlemen, please place your bets. I am loving the odds.

It's an interesting idea, especially considering the chart, which looks to be forming a nice base. However, after doing a bit of research, it seems the sentiment on the stock isn't nearly as negative as Cramer makes it out to be. Aside from some negative newpaper articles, the sentiment on the stock is actually quite positive.

First, the short interest has actually come down along with the stock. The short interest ratio currently stands under 5, which is far from a negative extreme.

Source: Bloomberg

In addition, the put/call ratio has fallen to 0 over the past several weeks, indicating that no one is buying puts.

Source: Schaeffers Research

Finally, while not all the Wall Street analysts are positive about SHLD, they are also far from a negative extreme. Here are the last four ratings changes on the stock from Yahoo Finance...

UPGRADES & DOWNGRADES HISTORY

Date

Research Firm

Action

From

To

1-Jul-05

Deutsche Securities

Initiated

Buy

23-Jun-05

CSFB

Initiated

Outperform

17-Jun-05

Morgan Stanley

Initiated

Underweight

16-Jun-05

Bear Stearns

Initiated

Outperform

I was hoping that sentiment on the stock was truly negative and that could help launch the stock out of the base that it is forming. However, based on the sentiment, I'm not sure if the stock has enough fuel to launch into a full blown short covering rally. Therefore, the base could break either to the upside or downside...

In addition, the fundamentals don't look so compelling that the stock is a no brainer buy. At 17x forward earnings, the valuation is actually higher than many of the company's peers in the department store industry.

The Sears house brands—Craftsman tools and Kenmore appliances—give the stores a flavor entirely different from the previous failed occupant, while the electronics department is now bigger and more coherent than the old Kmart version, with row after row of flashy TV screens along the wall. And there is plenty of Martha Stewart merchandise everywhere, from towels to $250 artificial Christmas trees.

The theory behind Essentials is that by expanding distribution of widely recognized (and still trusted) Sears house brands into Kmart locations that previously failed to generate enough business to justify the lease payments, Sears Holdings would generate higher sales and transform a liability—a long-term lease in a mediocre location—into an asset. The basic idea being that one plus one would equal three, maybe four.

Indeed, like its counterpart in northeastern Connecticut, this L.A. Essentials store had shoppers—not nearly so many as the clean, well-lighted, terrifically merchandized Target store a few miles away, but it had some shoppers.

Yet as I walked around the store and saw the merchandise placed with its usual Sears cluelessness, I found myself understanding why the whole thing seems so inconsequential: by opening Sears Essentials stores in old Kmart locations, all that has happened is…Sears has opened a bunch of new, mediocre stores.

That’s all.

The bottom line is that the stock might work, but the sentiment, fundamentals and valuation don't nearly represent the explosive upside potential that Cramer makes the stock out to posses. In the near future I hope to post another turnaround retail idea that I think is more compelling than SHLD.

James Cramer had an interesting observation about Schlumberger (SLB - or "slob" as it's known in trading circles) yesterday on Realmoney.com. He indicated that the stock had been strong because a large money manager just had to own the stock, no matter what price...

We all know that there's one big institutional buyer of Schlumberger, a big fund trying to make it a core position. We all know that the guy is in a real hurry and relentless and doesn't care if oil goes up or down.

But now that the stock has moved into the stratosphere as the group languishes, I have to think that it might be right to go short it vs. one of the other drillers.

Cramer suggests a long Halliburton, short Schlumberger trade. However, I would just stick to a one sided trade - similar to the James Altucher one-sided-pair-trade as he described in his book Trade Like a Hedge Fund.

The reason I think this trade could work is that both SLB and the OSX have hit DeMark Sequential 9 Sell signals. In addition, the oil index could be tracing out a double top.

Finally, the price of SLB has completely disconnected from the price of oil, as shown on the chart below. Typically, SLB and oil move in synch with one another. However, in the past three weeks, SLB has gone parabolic, while the price of oil has actually gone down. SLB is represented by the black line on the chart.

It's worse than you thought for GM and Ford. If high gas prices, ugly cars and crushing pension costs weren't enough to relegate GM and Ford to the Chapter 11 dust bin, this will do it -- Even the people in Montana are trading in their trucks for hybrids. Next thing you know, George Bush will be puttering around on his Texas ranch in a Toyota Prius....

Big Sky, Meet Small CarAt home on the range with a hybrid? How Montana started caring about m.p.g.ByWALTER KIRN

Thanks to the intrepid Lewis and Clark and the creepy, costumed re-enactors who periodically retrace their steps, my fellow Montanans and I understand that crossing our vast and mostly empty state without repeatedly feeding debit and credit cards into the maws of greedy self-service gas pumps is, at least in theory, possible. It's a romantic, enchanting notion: walking and paddling great distances without a bulky wallet in one's back pocket. I doubt I'll ever try it, though. In a state where a visit to the nearest Home Depot can take a whole weekend and require a motel stay, a person wants a large and gutsy vehicle capable of cruising uphill at 90 m.p.h. and allowing its driver to yawn and stretch his arms while his passengers doze or play Scrabble in the backseat.

Because size matters to many Montana motorists (and the distances here make motorists of everyone), I knew something was terribly wrong this summer when hybrid cars started popping up around me. What were golf carts doing on Western highways? I wondered whether they had been here for a while and I just hadn't noticed their low profiles from the vantage point of my 1-ton pickup, which is jacked up so high that the average Toyota Prius could drive underneath it without a scratch. Or had I ignored the cute scooters out of my own guilt?

When I began spotting hybrids everywhere--even in the driveways of old-school ranchers who had always driven Cadillacs to town--I knew something profound was happening and in the least likely place for it to happen. Montanans were conserving gas? Impossible. It would be easier just to shrink the state.

Then last month, in a small-town bakery, I overheard this astonishing conversation: "I'm sorry that I got here late from Billings, but I'm trying to drive 55 these days. It's nice. You can really appreciate the scenery." In Montana, scenery is for tourists and not a thing that most residents ever talk about. Nor do they boast of driving a hundred miles at the speed of a John Deere tractor hauling hay. I butted in and asked the slowpoke if she had truly enjoyed her drawn-out trip or if it was just a civic-minded experiment inspired by listening to too much public radio. "I did," she insisted, "and I got so much done. I cleaned my whole CD collection and dusted my dashboard. Fifty-five is great."

That's when I knew the crisis might last forever--well before the President's speech last week on saving fossil fuel and even before Hurricane Katrina hit, when gas finally went the way of water and coffee and turned from a modest, ordinary liquid into a fancy, specialized elixir. The signs of change were coming nonstop. At the Costco warehouse store in Bozeman, 50 miles from my home in Livingston, I stopped bumping into my neighbors on Saturday mornings in the cavernous dog-and-cat-food aisle. They had stayed home, buying kibble by the normal-size bag rather than in great, budget-priced sacks. I worked out the math and concluded that they were right. To save six bucks on puppy chow, I had burned more than $16 in premium fuel.

"Don't fence me in," the cowboy sings, forgetting to add that without a healthy horse or a vehicle that he can afford to drive, he may as well be stranded on the prairie dying of thirst and hunger. To live surrounded by unlimited space that one is incapable of moving through is the quintessential Western nightmare: homebound on the range. Driving back from Bozeman that afternoon, I crunched some more discouraging numbers. I'd always heard that freedom had a price. And soon I'd determined what it was in my case, driving my mammoth, inefficient truck: 30Â¢ a mile. This meant that my high-speed gallop along the highway was costing me roughly a dollar every two minutes. I couldn't have been more flummoxed if I'd been told that I now had to pay a dime for every breath and a nickel for every heartbeat.

I mentioned this to an acquaintance, who laughed at me. He hadn't shopped in Bozeman since May, he said, because he and his family had sold their only vehicle large enough to hold pallets of paper towels. He asked me if I would be willing to take his shopping list if I went to Costco the following weekend. I said, "Sure," though I knew I wouldn't go back. I had heard a rumor that a friend of mine had ordered a Honda hybrid from a dealer (a waiting list for Hondas, in Montana?), and I decided to give him my list, since he could now drive to Bozeman all he wanted. I had formed my own conservation plan by then: keep my truck, but keep it parked--and, if I ever felt restless, dress up in buckskin. I have seen such characters trudging along the roads at times, and somebody always stops to pick them up.

Every day, it seems more and more like we're reliving the 1970s. Even the charts of the American vs the Japanese auto makers are turning back the clock. You would think that after the hard lesson from 30 years ago, American car manufacturers would have begun to make more fuel efficient cars. Oh well -- Live and don't learn.

Yesterday, Fed Governor Richard Fisher drove a stake through the market by declaring that the Fed isn't done raising rates despite the fact that the econonmy is slowing. Gee, Dick, any other good news you want to share with us? Any stock that's cyclical and rate sentive took it on the chin - chief among them homebuilders.

After several failed head and shoulders patterns on the homebuilder stocks, it looks like this one is finally going to take. Toll Brothers kissed the bottom of the neckline goodbye in dramatic fashion yesterday with a $2 drop. The target measurement of the head and shoulders pattern suggests a move to $36.

Several years years ago, a clever inventor came up with the Singing Fish - a startling little fish plaque that sung a tune and moved its head when you walked in front of it. At first, you could only buy the "Billy Big Mouth Bass" or "Boogy Bass" at at small outlet stores and flea markets but by Christmas of 2000, they were practically everywhere - CVS, Wal-mart, Hecht's Department Stores. You couldn't go into a store without walking by one singing some 1960s doo-wop tune.

When you see a product everywhere all of a sudden, it's known as "flooding the channels" in marketing speak. Each retail outlet - drug stores, department stores, dollar stores, Wal-Mart, specialty stores, the Internet - is a separate "channel" through which to distribute a product. Based on how marketers want to be positioned (luxury, value, middle tier), they will choose one or two of the channels through which to sell. When a product starts getting to the end of its life in one channel, often you will see marketers "flood the channel" or start selling the product everywhere. This often happens with luxury goods that "don't take" - one day you'll see a brand like Tommy Hilfiger being sold for a premium at a specialty store, the next day at a department store for a discount. It's usually a sign of trouble because it indicates a company has lost its identity or has saturated its intended market. And that's what happened to the singing fish - one day they were everywhere - then they dissapeared. Everyone that wanted one bought one and there wasn't any demand left.

So what does a high tech company like Research In Motion (RIMM) have to do with fad-toy singing fish? I think Research In Motion's Blackberry could go the way of "Billy Big Mouth Bass" because I saw the following odd cross promotion of Blackberry and Papa John's Pizza today -

Just add any Papa John's side item and two 20-oz. beverages to your online order to get this great offer. This offer is only available online. Upon completion of your Papa John's order you will immediately be linked to the site where you will sign up for your free* BlackBerry, which will be delivered by mail.

The real question is what does pizza delivery have to do with a snazzy little communications device? I think RIMM is "flooding the channel" with Blackberries. This will turn the niche product used by investment bankers and hedge fund traders into a mass market gadget. And it will eventually kill demand...everyone that wants one will have one. Being that RIMM is a one product company, I think it will eventually kill RIMM's stock as well. While Blackberry's won't dissapear completely like the singing fish, I think flooding the market will put pressure on RIMM's margins and, eventually, its sales as demand dissapears.

RIMM probably has perfectly good reasons to flood the channel. Technology from other handset manufacturers is finally starting to catch up to that of the Blackberry. And the Blackberry is much easier to use now than it was several years ago when you needed the tech guru to load RIMM software onto the mail server in order to be able to check your email. So flooding the channel is probably the right strategy. But it won't help the stock if demand does become saturated.

RIMM's stock is still being valued at over 27x forward earnings and almost 10x sales vs. Nokia (NOK) which trades at 16x forward earnings and 1.8x sales. If the Blackberry is simply a mass market hardware gadget, like a cell phone, and not a niche high end tech product, why would the market value it at such a premium? I don't think it should and I don't think it will.

Looking at the chart, RIMM is tracing out a 1-2-3 "Trader Vic" reversal pattern on the weekly chart. All that the stock needs to do now is break the sideways triangle consolidation to the downside. I wouldn't be shorting the former mo-mo stock at this moment since I could be wrong and the stock could break to the upside. But I would keep it on my screen for a potential violation of the downside trendline.

Yesterday, I gave several reasons why I believe the Energy Sector could begin a relatively sharp correction. I am following up with some individual stocks which I believe are overextended and could turn down if the oil sector rolls over. I am not recommending short sales of these stocks, but rather, offering a warning to traders that the trends are stretched and are hitting "hidden" resistance from the top of the rising trend channels.

First, I want to highlight the Energy Sector Bullish Percent chart, which measures the percent of stocks on a buy signal according to point and figure analysis. Currently, 96 percent of the S&P Energy Sector stocks are on a buy signal. The last time the sector was this overbought in March of this year (the number 3 on the chart represents the month), the Oil Services Index and S&P Energy SDRS began a two-month, 16% correction.

The following charts all have a similar theme. All are beautiful stock charts in strong rising channels. However, all are starting to stall at the upper trendline of the channel. Valero (VLO) and Chesapeak Energy (CHK) are rising on extreme volume spikes, indicating that speculative activity is increasing and making the stocks vulnerable to a sharp pull back. Two other energy stocks, Anadarko Petroleum (APC) and Nobel Energy (NBL), have risen on weaker volume and are also very overextended.

The one chart that does not look like the others is Schlumberger (SLB). The stock is an institutional investor favorite because it is one of the few large-cap oil services stocks that is liquid enough for large funds to build a position. The stock is not nearly as over extended as some of its smaller cap peers but the stock does look vulnerable to a correction. The Chaikin Money Flow and Accumulation Distribution line show that institutions haven't bought into the last rally. If you believe institutions represent the "smart money," the mixed volume trends show they are not chasing the stock higher like traders and retail investors.

Again, my intent is not to short these strong momentum stocks. Rather I want to warn traders that the first dip might not be a buying opportunity because energy stocks are extremely overextended, sentiment is extremely positive and a more serious correction could be in the works.

The companies which insure municipal bonds have come under pressure since the extent of the damage from Katrina has become appearant. However, more downside could be on the way.

Joe Mysak of Bloomberg.com makes an interesting point about municipal bond insurers...

The market is not used to seeing natural disasters produce bond defaults, primarily because natural disasters tend to be very short-term events, with residents returning to their homes or what's left of them relatively quickly to rebuild. What makes this natural disaster so different is that it may take months before people are allowed to return to their homes.

Then there are the bond insurers. Last week the four major bond insurers announced they had almost $13 billion in exposure to credits that were in Katrina's path, almost $4 billion in New Orleans alone. There are going to be some interesting days ahead for these insurers, who since they began doing business in 1971 have said they underwrote business to a zero-loss standard. That is, these insurers collected premiums with the expectation that they would never have to pay claims.

They are going to have to pay claims, perhaps lots of them.

If Mysak is correct, it highlights MBIA (MBIA) as a potential problem for the financial markets. MBIA insures municipal bonds so that municipalities and other government agencies can obtain lower interest rates. A Fortune article that detailed the long and short story of MBIA's stock explained it this way -

At first glance, MBIA's business is both elegant and simple. The core idea is that a municipality—say, Kansas City—will be willing to pay a small premium to have its bonds insured, because the triple-A rating will lower its interest cost. As long as the premium MBIA charges is less than what the client is saving in interest costs, it can market its product as a way for issuers to save money. MBIA is often paid its premium up front, which it then recognizes as revenue over the life of the insurance. That means that a substantial portion of future year's earnings are already in the bank. Analysts often cite MBIA's smooth, predictable earnings as a reason to own the stock.

Bond insurance has proved to be wildly popular—and profitable. MBIA was founded by a group of insurers in 1974, and today about half the municipal bond market is insured; MBIA is the market leader with about 18%.

Aside from numerous off balance sheet entities and regulatory problems, the Fortune article points out that MBIA considers itself a "no-loss" underwriter...it doesn't actually expect to pay a claim. Again from Fortune...

To outsiders, there is another aspect of the business that is truly through the looking glass. Unlike other insurers, which expect to suffer some level of losses, MBIA prides itself on "no-loss underwriting." In other words, the company never intends to actually have to pay a claim. MBIA says that, with rare exceptions, it insures only debt that is deemed relatively safe, or "investment grade," by the rating agencies, though some issues get downgraded after the initial guarantee. Today the company says that 98% of the debt it guarantees is investment grade. MBIA has had occasional losses, but if they were to become a regular, sizable occurrence, that could threaten its triple-A rating and blow a hole in its business model.

At MBIA's conference for its investors in March, Gary Dunton presented what he calls "my favorite slide." It shows that over MBIA's three decades in business, the company has guaranteed more than $1.8 trillion of debt service and suffered only $586 million in losses, or about 0.03%. To many investors, this is all the proof they need that MBIA can come very close to its promise of zero losses.

But now, as Joe Mysak points out, MBIA and other bond insurers are going to have to pay claims. According to Reuters, MBIA insured $2.88 billion in municipal bonds in the hurricane-struck area. MBIA has $6.5 billion in capital, so despite potentially taking a big hit, even if it had to play claims on all the bonds, MBIA would be far from failing.

However, the main problem is that MBIA relies on its own stellar credit rating to insure other municipalities. Again from Fortune...

The key to MBIA is that the credit-rating agencies—such as Standard & Poor's—give its insurance arm the rare and coveted rating of triple A. That means that MBIA is judged to be one of a handful of the most financially sound companies in America, up there with Exxon Mobil and GE. When MBIA insures, or in industry lingo "wraps," a bond, it gives that bond the attributes—mainly a lower interest rate—of a triple-A-rated bond. In other words, what MBIA sells is its triple-A rating. As CEO Gary Dunton wrote in his 2004 letter to shareholders, "MBIA's true constant—our North Star, if you will—is our commitment to protecting our triple-A ratings."

If MBIA did indeed have to pay out claims and weaken its balance sheet, the company could be in danger of losing its triple A rating. Remember, this is a company that never expects to have to pay a claim, and according to Fortune, has gone to extreme lengths to hide even minor hits to its balance sheet. It is this triple A rating that is so valuable to MBIA and its ongoing business and I believe this rating could be in jeopardy once the damage assessments come in much higher than expected.

A Reuters story indicates that the rating agencies which gave MBIA its triple A rating have already warned that Katrina could cause cash crunches for the states, cities, towns, schools and agencies that sold municipal debt. Standard & Poors said that it is reviewing $7.8 billion in debt issued by municipalities in Mississippi and Louisiana.

I am far from an insurance expert but it seems to me that when you have businesses that insure something for which they expect no claims, and huge unexpected claims arise, it could lead to problems.

I am picking on MBIA because it has already been targeted by short sellers and it is the largest company that insures municipal bonds. However, several specialty financial firms that sell insurance for municipal bonds could also come under pressure.

According to Reuters, these are the top municipal bond insurance companies in the region and their level of exposure.

Symbol

Name

Exposure

Equity

Private*

Financial Guaranty Insurance

$4.15 billion

$3.8 billion

ABK

Ambac Financial Group Inc

$3.8 billion

$5.3 billion

MBI

MBIA Inc

$2.88 billion

$6.59 billion

Foreign

Financial Security Assurance

$2.2 billion

NA

RDN

Radian Group

$485 million

$3.6 billion

* 40% owned by PMI Group (PMI)

XL Capital (XL) also has some exposure to the area, but it is limited compared to the size of the firm.

Again, I don't believe any of municipal insurers will fail as a result of defaults but business could suffer if the rating agencies decide that companies such as MBIA and Financial Guarantee Insurance do not deserve their highly vaunted triple A rating. And that rating and guarantee is essentially what municipalities are paying for when they insure their debt with these companies.

If the first rule of investing is "Don't fight the Fed" then investors and traders should steer clear of homebuilder and REIT stocks. Make no mistake, as his remarks from last week indicated, Chairman Alan Greenspan has a bead on rising housing prices.

There's an eerie similarity between Greenspan's remarks in 1999, as the Federal Reserve began increasing interest rates to stem the Internet stock bubble, and those he made last week at the annual Federal Reserve Bank of Kansas City symposium. The only difference is, last week, Greenspan targeted rising home prices instead of rising equity prices.

I have included key excerpts from speeches in the two interest tightening cycles. The first quote comes from mid 1999, after the Federal Reserve first raised interest rates. The second quote comes from last week. And in case your "Fed-speak" is rusty, I'll summarize. Greenspan essentially believes that excessive increases in prices (stocks, bonds or homes) are bad because, when they reverse, they negatively affect all other parts of the economy. Therefore, he believes it is better to pop the bubble through tighter monetary policy, than let the market run its course.

"Equity prices figure importantly in that forecasting process because they influence aggregate demand....Should an asset bubble arise, or even if one is already in train, monetary policy properly calibrated can doubtless mitigate at least part of the impact on the economy. And, obviously, if we could find a way to prevent or deflate emerging bubbles, we would be better off....The danger is that in these circumstances, an unwarranted, perhaps euphoric, extension of recent developments can drive equity prices to levels that are unsupportable even if risks in the future become relatively small. Such straying above fundamentals could create problems for our economy when the inevitable adjustment occurs. It is the job of economic policy makers to mitigate the fallout when it occurs and, hopefully, ease the transition to the next expansion."

-- CHAIRMAN ALAN GREENSPAN, Committee on Banking and Financial Services, U.S. House of Representatives, July 22, 1999

"The rising prices of stocks, bonds and, more recently, of homes, have engendered a large increase in the market value of claims which, when converted to cash, are a source of purchasing power....Such an increase in market value is too often viewed by market participants as structural and permanent....Any onset of increased investor caution elevates risk premiums and, as a consequence, lowers asset values and promotes the liquidation of the debt that supported higher asset prices. This is the reason that history has not dealt kindly with the aftermath of protracted periods of low risk premiums.If we can maintain an adequate degree of flexibility, some of America's economic imbalances, most notably the large current-account deficit and the housing boom, can be rectified by adjustments in prices, interest rates, and exchange rates rather than through more-wrenching changes in output, incomes, and employment."

Since short term interest rates are the Federal Reserve's only weapon to fight bubbles, the Chairman's desire to defeat the "housing boom" will have consequences for the entire economy. However, it will have the most consequence for the home building and REIT sectors.

Homebuilder stocks, as measured by the Philadelphia Housing Index (HGX), are already nearing important long term support as shown in the weekly chart. A break below the 515 level would indicate a move to the next level of support at 450.

Several components of the HGX index have already broken short-term uptrends and are poised to retreat to longer term support. For example, Toll Brother's (TOL) has already broken its first rising trendline at $50 and looks to be headed for a test of the longer term trend around $35. While it is sitting on some minor support at current levels, the risk to reward seems to be skewed to the negative side.

REITs, which are even more closely tied to interest rates than homebuilder stocks, could also have a tough time. The Dow Jones REIT Index (DJR) is forming an ominous looking long term rising wedge, which typically breaks to the downside.

Despite his penchant for rambling, Greenspan couldn't have been clearer in his message last week. Investors and traders should take heed of Greenspan's remarks because equities tied to housing demand could be in for a difficult time until the Federal Reserve is satisfied that housing prices have begun to decline.

From Steve Sjuggerud at Investment U, regarding the top in housing stocks -

As of yesterday, new home prices have spiraled downward for three straight months.

They're down 14% in that time, from $236,300 in April, to $203,800 today. A drop of more than $30,000!

Yet the media reported exactly the opposite...

"New home sales defied expectations, rising 6.5% to break yet another record during July." That's what The Wall Street Journal reported on page C2 today in the markets section. But they left out a very important detail.

The Second "Story" to Housing

The way The Wall Street Journal reported the statistics, it seemed like home prices have been going up. But it was the number of houses sold rising 6.5%. The median price of a home fell in July alone by - get this - 7.2%. Wow!

Take a look:

That's a pretty nasty drop, no? Why wasn't this reported with more fanfare? (To be fair, there was a brief mention - one phrase - on the drop on page A2 of the WSJ.)

From New Homes to Home Builders, It's the Same Story

The stock market tends to lead the economy (that's why it's best to buy stocks in bad times, and sell them when times look too good). If this is true, then housing stocks (homebuilders) might be said to lead the market for new homes.

It's been true... housing stocks have soared for a few years now. But they've been falling in the last month or so. The entire index is down roughly 10% from its high a month ago.

The S&P stock committee became more active in adding and removing companies from its indexes in the mid 1990s and, in the process, has become an excellent contrarian indicator. In their attempt to be up-to-date and representative of the "current economy," the S&P committee has also fallen into the trap of adding overvalued stocks and removing undervalued, out of favor stocks. The current changes continue the trend with the addition of a REIT and a super cyclical for an airline stock. The committee also added another homebuilder to the S&P 500.

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